Today's Technical Outlook - 1/30/2014

Jan. 30, 2014 12:23 PM ET

Market Summary

David ChojnackiS1F Market Technician

Emerging market problems and falling currencies, once again put some fear in the indices at the open. The major averages fell quickly at the open and then moved sideways till late afternoon, when another sell program came in and took the averages to near their lows of the day. By the final bell the major indices were looking at moderate losses. At the close, the DJIA was down 1.1%, the S&P lost 1%, and the Nasdaq100 also pulled back 1%. Breadth was decidedly negative, 3.4 to 1, on above average volume. RSI's were lower in the session with the DJIA , approaching over-sold territory. ROC(10's) declined in the session and are in negative territory for all three major indices. The averages lost ground on a pick-up in volume. The increase in volume has been notable on negative days. MACD's remain below signal for all three major averages. The S&P closed just near the 1772-75 support level, which a drop below, would indicate further downside bias. A 5% pullback in the S&P would take us to the 1756 level. A 5% pullback in the Nasdaq100 takes us to 3446. The VIX gained 9.8% to finish at 17.35. The 10 year yield moved down to 2.68%. The S&P near term support is now at 1772-75 and 1762. Near term upside resistance for the S&P is now at 1788 and 1800. The Nasdaq100 near term support is now at 3462 and 3450. Near term upside resistance is now 3575 and 3488. The Nikkei was down nearly 2.5% over-night. Europe is lower in early trade. We get Employment Claims data and GDP this morning. Remember, this is the new GDP calculation, which began in the second quarter. Futures are higher this morning versus fair value.

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Data sources include ETF Database, ETFTrends.com, IndexUniverse.com, Google Finance, and Bloomberg data and at times other data sources are utilized. Leveraged, Inverse & Leveraged Inverse Conclusions and Risks 1) Leveraged, Inverse, and Leveraged Inverse (L&LI) ETFs generally capture a high percentage of their expected daily returns, particularly on a net asset value basis. 2) L&LI ETFs are not appropriate for all investors. However, we believe they can be appropriate tools for some investors looking to make short-term tactical trades if they perceive a high likelihood of a strong market move occurring in a relatively short time period. In strong trending markets, being on the right side of the "trade" with L or LI ETFs can lead to very strong returns. 3) Investors should not expect these ETFs to deliver total returns linked to their benchmarks over any period other than daily. The effects of compounding and the daily re-leveraging or de-leveraging that occurs with L&LI

ETFs can lead to unexpected results over the long term. As a result, we believe longer-term investors should consider regularly rebalancing positions. 4) Trendless markets, particularly those with a high level of volatility, can lead to substantial relative underperformance of L&LI ETFs. 2) Leveraged and Leveraged Inverse (L&LI) ETFs typically utilize futures and equity swap agreements. The use of these derivative instruments increases risk and enhances the possibility of tracking error.

Relative to traditional ETFs, leveraged, inverse and leveraged inverse ETFs typically have higher costs and lower tax efficiency. 3) The effects of compounding can lead to significant deviations from traditional benchmarks over longer time periods. For example, if $100,000 is invested in an index that increases in value by 10% on day one and then decreases in valueby 10% on day two, the investment will be worth $110,000 at the end of day one and $99,000 after day two. However, the value of a security that doubles the daily performance of the index would be worth $120,000 on day one and $96,000 after day two. Thus, the index is down 1% after two days, a doubling of which would be down 2%. However, the security attempting to double the return of the index is down 4%. Investors should consider carefully the potential impact over longer periods. MLP and MLP ETF Risks Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance on the capitalmarkets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity volume risk.

For tax purposes, MLP ETFs are taxed as C corporations and will be obligated to pay federal and state corporate income taxes on their taxable income, unlike traditional ETFs, which are structured as registered investment companies. These ETFs are likely to exhibit tracking error relative to their index as a result of accounting for deferred tax assets or liabilities (see funds' prospectuses). The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund's value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP fund's after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. Commodity ETF Risks Commodity ETFs may be subject to greater volatility than traditionalETFs and can be affected by increased volatility of commodities prices or indexes as well as changes in supply-and-demand relationships, interest rates, monetary and other governmental policies, or factors affecting a particular sector or commodity. Currency ETF Risks Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. ETFs mentioned at times may have material exposure to small cap and/or international securities that may have higher levels of risk and volatility than other ETFs.